How Much Is Bitcoin Really Worth?

I'm sitting at my kitchen table at 6:31 p.m. ET on Friday, December 1, 2017. The price of Bitcoin is $10,790.58.

PARIS, FRANCE - DECEMBER 05: In this photo illustration a man holds a visual representation of the digital Cryptocurrency Bitcoin. (Photo by Chesnot/Getty Images)

It's here that I'm reminded of something Warren Buffett's often said. Price is what you pay, value is what you get.

So what value does a Bitcoin buyer get in exchange for $10,790.58 of his or her hard earned U.S. dollars? That's what I'm going to attempt to answer in this article.

Before we can attempt to value Bitcoin, we first must agree on what it is. That turns out not to be so easy.

Is Bitcoin a currency?

Describing Bitcoin as a currency seems like a natural place to begin. After all, I'm told some retailers accept Bitcoin as a method of payment. On closer inspection, however, comparing Bitcoin to a currency is like comparing lightening to a lightening bug (apologies to Mr. Clemens).

As the WSJ has noted, Bitcoin is the hottest currency that nobody is using. As Jeffrey Dorfman here at Forbes pointed out, there are two problems with Bitcoin as a currency.

First, it's too unstable. Who wants to accept something for payment that could drop in value by 25% before you have time to pour a cup of coffee? Put another way, would you accept Bitcoin as payment for a car you were selling if you had to wait 60 days to convert it to dollars? I doubt it.

Second, it's too slow. It can take days to complete a single transaction. By then, the cup of coffee you're trying to purchase is stone cold.

Bitcoin is not a currency in any meaningful sense of the word.

Is Bitcoin a store of value?

Gold apologists love to describe the precious metal as a store of value. It somehow gives the "investment" an air of sophistication. Some Bitcoin acolytes have borrowed from the same playbook to call Bitcoin a store of value.

The idea is appealing at first. They note that the U.S. dollar and other currencies are "fiat" money. In other words, there's nothing backing the value of currencies today, like gold once did. While that's also true of digital currencies, they are limited in number. The number of Bitcoin is capped at 21 million. A government can't step in and start "printing" more Bitcoin.

It reminds me of the argument people made to justify the meteoric rise in real estate values ten years ago. After all, they aren't making more land. That argument didn't turn out so well.

All of that said, one can certainly see a use for digital currencies in some parts of the world. In the U.S. we have a stable currency and banking system. That's not the case in many parts of the world, where a digital currency free from government intervention and corrupt bankers could prove very useful.

The problem, however, is that Bitcoin and other digital currencies are still not widely accepted as a medium of exchange. That they may be useful in limited circumstances and geographies doesn't, at present, make them a store of value

So what is Bitcoin?

Bitcoin and other cryptocurrencies can best be described as potential currencies. As noted above, they are not widely accepted today as a medium of exchange. And they have significant limitations holding them back from developing into full-fledged currencies. But it's possible, though I think unlikely, that they could become more widely used in the future as a medium of exchange.

Bitcoin fanatics will take issue with all of the above. They will point to the devaluation of fiat currencies. They will hype the blockchain. They will argue that cryptocurrencies are the future. They may even try to sell you an online course, for four easy payments of $199 (U.S. dollars, not Bitcoin, thank you very much) on how to make millions in digital currency.

It still doesn't change the fact that Bitcoin has not been adopted as a useful, stable currency.

How do you value a potential currency?

The short answer is that you can't. It's impossible to assess the value of Bitcoin with any degree of reasonableness. And this is a critical limitation to understand.

It's not uncommon to pass on a potential investment because you can't determine its value. I love Amazon as a company. I have no idea what its intrinsic value is. Same goes for Tesla. So I've passed on both potential investments.

Bitcoin is far more difficult to value. It has no intrinsic value. It has a short history with wild price swings. And as of yet, it has limited usefulness.

Is Bitcoin a bubble?

The meteoric rise in its price shouldn't be confused with its true value.

In this sense Bitcoin is experiencing a classic bubble. The rise in price has motivated more buying, which in turn raises the price. The rise in price motivates more buying, and this cycle continues for a time.

Eventually the process will reverse. The price will eventually reach a peak that motivates Bitcoin owners to sell. When enough sell, the price will start to drop. The drop in price will motivate more selling, which will lower the price further.

Pain and anguish for many will be the result.

It's now 4:59 a.m. on December 7, 2017. The price of Bitcoin stands at $14,980.00. It's risen nearly 40% in the week since I started this article.

I am an investor, lawyer, blogger, husband, father, and Buckeye fanatic. I graduated in 1992 from law school and have worked in private practice, in-house for a publicly traded company, and for a regulator in the securities industry.
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